Oil heads higher as Ukraine tensions escalate — price depends on what happens next

Oil prices are rapidly heading toward $100 US a barrel, but analysts say the chances of crude smashing that threshold greatly depends on what happens next in Ukraine.

The potential for a war in eastern Europe has made energy prices volatile over investor fears that conflict between Russia and Ukraine could disrupt supplies. Russia produces 10 per cent of global oil supply.

On Wednesday, the benchmark West Texas Intermediate price came close to $94 US per barrel in the morning's trading, and many experts have suggested it will go higher.

"I think based on the momentum we're seeing, unless we see a major pullback in Russian aggression, we likely will top $100 a barrel," said Rory Johnston, managing director and market economist at Toronto-based Price Street Inc.

"But as of yet, this does seem to be purely geopolitical risk pricing, rather than any immediate fear of an actual loss of barrels."

Investors have been closely watching developments in Ukraine, where Russia has amassed troops for a potential invasion. The U.S. and other western nations have already responded with sanctions — driving investor concerns that Russia could respond by halting oil exports — and Germany withdrew a document needed for certification of the Nord Stream 2 gas pipeline from Russia.

Johnston said it's highly unlikely the Ukraine crisis will result in a physical loss of barrels to the market, but if that were to happen, it would be "an extremely big deal."

In the worst-case scenario, he said — such as an all-out armed conflict between Russia and NATO forces — oil prices could skyrocket.

"Say we lost half of Russian production, which again I think is very unlikely," Johnston said. "But yeah, $130, $150 — pick a number in the hundreds and you could very easily justify it."

Patrick de Haan — head of petroleum analysis for gas price information website GasBuddy.com — said the effects of tensions in Ukraine have already affected gasoline prices in Canada, with the average price at the pump steadily increasing over the last few weeks. On Wednesday, according to GasBuddy.com, the average retail gasoline price in Canada was 156.2 cents per litre.

"We do expect prices to continue to rise throughout the spring and potentially summer," de Haan said in a email, adding prices typically rise in the spring anyway and the situation in eastern Europe is expected to exacerbate that trend.

"All of these factors could contribute to gas prices potentially increasing 15 to 30 cents per litre between now and the end of May, or more depending on the outcome of the Russia situation," he said.

A TD Economics report Wednesday said the economic fallout from the Ukraine crisis will be "highly path dependent on what comes next" and the scope of any further Russian incursion into Ukraine. TD laid out two scenarios — one in which oil prices spike but then reverse within a quarter or two.

In a second, more severe scenario, TD says the energy shock could be accompanied by a "global confidence shock" that drags equity markets down and could impact Canadian economic growth in 2022.